Chapter 3 (1/2)

Question 1

Time Period Assumption

Answer 1

presumes an org’s activities can be divided into specific time periods (months, quarters, years, etc)

Question 2

Accounting Period

Answer 2

span of time over which accting info is reported

Question 3

Annual Financial Statements

Answer 3

report covering a one-year period

Question 4

Interim Financial Statements

Answer 4

report covering one, three, or six months of activity

Question 5

Fiscal Year

Answer 5

consists of 12 consecutive months or 52 consecutive weeks

Question 6

Natural Business Year

Answer 6

ends when sales are at their lowest level for the year

ex: Target’s nby ends around Jan 31

Question 7

Accrual Basis Accounting

Answer 7

records revenues when services and products are delivered

records expenses when incurred (matched with revenues)

Question 8

Cash Basis Accounting

Answer 8

records revenues when cash is received

records expenses when cash is paid

Question 9

Cash Basis Income equation

Answer 9

(Cash Receipts) - (Cash Payments)

Question 10

Most agree than ____ basis accting better reflects company performance than ____ basis accting

Answer 10

accrual, cash

Question 11

Revenue Recognition Principle

Answer 11

revenue is recorded when goods/services are provided to customers and at an an amount expected to be received from customers

Question 12

Expense Recognition (Matching) Principle

Answer 12

expenses are recorded in the same accting period as revenues that are recnogized as a result of those expenses

Question 13

Four Types of Adjustments (for transactions/events that extend over more than one period)

Answer 13

1. Deferral of Expense
2. Deferral of Revenue
3. Accrued Expense
4. Accrued Revenue

Question 14

Process to Make Adjustments

Answer 14

1. Determine what the account balance equals
2. Determine what the account balance should equal
3. Record an adjusting entry to get from Step 1 to Step 2

Question 15

Each adjusting entry at the end of an accounting period reflects a transaction that (is) / (is not yet) recorded

Answer 15

is not yet

Question 16

An adjusting entry affects how many income statement accts and balance sheet accts

Answer 16

1+ of each, but never cash

Question 17

Prepaid (Deferred) Expenses

Answer 17

assets paid for in advance of receiving their benefits

when these assets are used, advance payments become expenses

Question 18

FRAMEWORK: Deferral of Expense

Answer 18

• increases (debits) expenses

- decreases (credits) assets

Question 19

Plant Assets

Answer 19

also called PP&E;
long term tangible assets used to produce and sell products/services

is a prepaid expense

Question 20

Do all plant assets depreciate over time?

Answer 20

Not all, land is excluded

Question 21

Salvage Value

Answer 21

an asset’s expected value at the end of its useful life

Question 22

Depreciation

Answer 22

the allocation of the costs of assets over their expected useful lives; does not necessarily measure decline in market value

Question 23

Straight Line Depreciation

Answer 23

allocates equal amounts of the asset’s net cost to depreciate during its useful life

Question 24

Accumulated Depreciation

Answer 24

a separate contra acct; has a normal credit balance

Question 25

Contra Account

Answer 25

an acct linked with another acct; has an opposite normal balance to it’s counterpart

is reported as a subtraction from the other acct’s balance

Question 26

Book Value (Net Amt)

Answer 26

(Asset’s Costs) - (Accumulated Depreciation)

Question 27

Unearned (Deferred) Revenue

Answer 27

cash received in advance of providing products and services

is a liability

Question 28

FRAMEWORK: deferral of revenue

Answer 28

• decreases (debits) liability

- increases (credits) revenue

Question 29

Accrued Expenses (Liabilities)

Answer 29

costs that are incurred in a period that are both unpaid and unrecorded

reported on income statement for the period when incurred

ex: salaries, interest, rent, taxes

Question 30

FRAMEWORK: accrued expense

Answer 30

• increases (debits) expense)

- increases (credits) liability

Question 31

Accrued Interest Equ

Answer 31

(Principal Amt Owed) x (Annual Interest Rate) x (Fraction of year since last payment)

ex: $6k loan at 5% annual int…30 day’s accrued interest is $25
($6,000) x (0.05) x (30/360)

Question 32

Banker’s Rule

Answer 32

interest computations use a 360 day calendar

Question 33

Accrued Revenues (assets)

Answer 33

revenues earned in a period that are both unrecorded and not yet received in cash (or other assets)

Question 34

FRAMEWORK: accrued revenue

Answer 34

• increases (debits) asset

- increases (credits) revenue

Question 35

Accrued Interest Revenue

Answer 35

• interest receivable (asset): DEBIT

- interest revenue (rev): CREDIT

Question 36

Deferral

Answer 36

paid (or received) cash before expense/revenue recognized

Question 37

Accrual

Answer 37

paid (or received) cash after expense/revenue recognized